ANALYSIS: Experts greet tax reforms with mixed sentiments

ASSET ALLOCATION PLANS The chief economist at Citigroup Inc Taiwan said tax cuts on inheritance and gift levies would not substantially alter the status quo

By Crystal Hsu and Kevin Chen / STAFF REPORTERS

The legislature’s approval of a flat 10 percent rate for inheritance and gift taxes is expected to slow down capital outflow but the move may prove inadequate to induce capital repatriation or turn Taiwan into a regional financial center, pundits said earlier this week.

On Monday, the legislature approved the Cabinet’s proposal to set the inheritance and gift levy at a fixed 10 percent from the current range of 2 percent to 50 percent, depending on the amount inherited or given.

“We believe this will stop capital outflow in the short-term, while meaningful capital repatriation would require the investment environment to improve,” Andre Chang (張致竑), an analyst at Citi Investment Research, wrote in a client note issued on Tuesday.

Vice Premier Paul Chiu (邱正雄), who leads the Tax Reform Committee, said in a position paper issued in October that an average of NT$1.2 trillion (US$360 million) in capital fled the country each year over the last five years. Another estimate by Citigroup showed that wealthy Taiwanese are holding roughly US$450 billion in offshore assets.

With many of the nation’s richest people moving their fortunes abroad in a bid to pay less taxes, the national treasury collects about NT$23.5 billion in inheritance and gift taxes each year, Minister of Finance Lee Sush-der (李述德) said. That number represents a mere 1.5 percent of total tax revenues for last year, when the amount was NT$1.755 trillion, based on a ministry report released last week.

The ministry estimated a cap of 10 percent would cost the national treasury some NT$20 billion a year, but at the same time the reduction in inheritance and gift taxes could lower the amount of capital drain by 10 percent, or NT$120 billion, raise the nation’s GDP by NT$60 billion and generate an extra NT$8.1 billion in tax revenues each year, Chiu forecast in the paper.

The change would have a positive effect on market sentiment and was a critical first step to clear barriers for capital repatriation, a Standard Chartered Bank economist said in a telephone interview.

“More tax reform is necessary before Taiwan can become a regional financial center though opportunity costs will drop considerably following the cuts on inheritance and gift taxes,” Tony Phoo (符銘財) of Standard Chartered said on Wednesday.

Phoo said the nation’s personal income tax was higher than in Singapore or Hong Kong and the government should address the issue if it wants to attract global talent.

As far as capital repatriation is concerned, investors expect the local real estate and financial sectors to benefit from rising wealth management and transaction business.

The building material and construction sub-index, which reflects the general share performance of the real estate sector, rose 2.38 percent in the first two days after the legislature’s approval of the tax cuts, before it was hit by an across-the-board decline on the local bourse on Thursday. For the week, the sub-index dropped 2.48 percent.

Shares of the financial sub-index also rose 3.3 percent in the first three sessions this week, before Thursday’s plunge. It fell 3.1 percent for the week, Taiwan Stock Exchange’s tallies showed.

“As the best tax-saving vehicles, properties are likely to benefit from these tax changes,” Chang wrote in his client note.

The Citigroup analyst cited two reasons why property shares would benefit from the tax cuts in the long term, namely lower property valuation and lower interest rates.